Why Bitcoins are Just as Viable as Any Other Currency

The true value of any currency is a reflection of how much people believe it's worth, according to CIO blogger Constantine von Hoffman. But it's wise to remember just how fast beliefs can change.

A lot of very smart people say a lot of very silly things about the online currency Bitcoin. For the most part the silly things can be summed up with the following statement: Bitcoins aren’t a real currency.

Bitcoins only exist online. They are not issued by any government, and they can be used totally anonymously. (That’s the short explanation; you can find a longer one here.) Since their introduction in 2009 Bitcons have sold for around $10 each.

The price lately, however, has been staggering around more than a drunk after last call. As of last Wednesday, the trading exchange Mt. Gox was selling them for $266 each. Later the value collapsed to $105, then rebounded to $180 and then dropped again to $120. And as of Saturday, April 13, Bitcoins were going for around $114. 

Here’s what Joe Weisenthal of Business Insider has to say about Bitcoins:

"There's a popular meme going around that fiat currencies (like the dollar, the British pound, the euro, and the yen) have no intrinsic value, and that they're only accepted because they're accepted, and that at some point, people will see through the "illusion" of the value of paper money, and realize that wealth lies somewhere else. Usually this argument is made by gold bugs. But fiat currencies have tremendous intrinsic value because governments say they do."

Weisenthal explains that the U.S. dollar has intrinsic value because the government says it does; it is backed by the power of a government that compels people to pay it in dollars.

But the history of money shows it's not just fiat currencies that have no intrinsic value. None of the things people traditionally think of as money, including gold and jewels, actually have intrinsic value. If they did then cowrie shells and huge stone wheels (among other things) would never have been used as currency. These items were used for one simple reason: Money is the greatest, longest-lived collective illusion in humanity’s history.

Gold is a perfect example. Gold’s only intrinsic (that is to say, in and of itself) value is if you need a very malleable metal that is also a superb electrical conductor. In which case, it has great value. Yet someone or a group of someones decided a long, long time ago that because gold was hard to come by that they would give goods and services in exchange for it.

The idea spread so far and so wide that a nation's collection of gold eventually determined how much money it would print. This created economies that went boom and bust with amazing regularity. Most industrialized nations cut the link between gold and currency around World War I because if they didn't they wouldn’t have been able to afford to keep fighting the war. (What a shame that would have been.) The United States didn't make the separation until 1971, when Richard Nixon, who was also trying to pay for a pointless war, took America off the gold standard. Economies based on fiat currencies, until the last decade or so, significantly decreased the frequency of boom/bust cycles.

The value of money today is determined by how much faith people collectively have in a nation, its government and its economy. That’s why exchange rates fluctuate. This method, while effective, is even more irrational than it seems. The European financial crisis has been fueled by investors who were nervous about countries' debt levels. Well, at least some countries. Japan’s debt dwarfs that of any E.U. nation that went belly up, yet its currency is just fine. Why? Because Japan will eventually do better...or at least that's the common belief.

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